Making sense of Merapoh’s oil refinery project in Yan

IN times of economic slowdown, it is always refreshing to hear news of large investments taking place in the local economy.

Hence, when Merapoh Resources Corp Sdn Bhd announced over the week that it had secured investments to build a US$10bil (RM35bil) crude oil refinery facility in Yan, Kedah, a sense of excitement was stirred up in the market, particularly for the oil and gas sector.

More expensive than the Bakun hydroelectric dam project in Sarawak (not of the same industry), the proposed oil refinery project by private company Merapoh definitely qualifies as another mega project for the country.

The planned facility also raises hope for the revival of an earlier proposed Trans-Peninsular Pipeline mega project, which according to Kedah Menteri Besar Datuk Azizan Abdul Razak, was still under review.

To recap, the Trans-Peninsular Pipeline project was mooted in 2007 by Trans Peninsula Petroleum Sdn Bhd. It involved construction of a 312-km oil pipeline connecting Yan in Kedah with Bachok in Kelantan. The project also included a crude oil refinery in Yan and three storage tanks in Bachok.

The idea was to transfer crude oil from the Middle East to East Asia without going through the busy Straits of Malacca, so as to shorten voyage time by an estimated three days and minimise the risks of pirate attacks. However, there was little progress on the project which some attribute to cost and geography related issues.

At this point however, it is unclear whether Merapoh’s oil refinery project is part of the earlier proposed Trans-Peninsular Pipeline project.

Boasting a capacity of 350,000 barrels per day (bpd), the proposed oil refinery in Yan is deemed to be the biggest oil refinery facility in Malaysia upon completion by end of 2013 or early 2014.

Merapoh executive chairman Mohd Nazri Ramli told reporters on Wednesday that construction of the project would start next month.

Nazri added that the company had awarded the engineering, construction and maintenance works of the project to SK Engineering and Construction Co of South Korea.

Other strategic partners for the project included China National Petroleum Corp, which would buy 200,000 barrels per day of the refinery’s output under a 20-year deal, and Saudi Aramco, which would be the company’s main supplier of crude oil.

In other words, Merapoh’s proposed refinery facility is to process imported crude oil (not local production) into refined products for export mainly to East Asia.

Some analysts are concerned about Merapoh’s ability to secure the huge financing required at attractive rates amid a relatively tight credit market environment.

Nazri indicated that the company had already secured initial funding from private Chinese equity companies – Hong Kong Beijing Star Ltd and Winston Investment Ltd. The duo would each invest US$5bil and take up 40% stake, respectively, in the project, while Merapoh would hold the remainder 20% stake.

Economic stimulant

The proposed oil refinery project is expected to create 1,500 jobs upon completion, of which 500 would be engineering and oil-related professional jobs.

Merapoh’s proposed oil refinery project is also expected to benefit some of the local oil & gas players, as more jobs along the value chain of the sector would be made available.

Merapoh had said that it would award 30% of its project’s contracts to local companies.

Analysts believe that the main beneficiaries of the project are likely to be fabricators and those involved in the downstream activities, with selective upstream players such as marine vessel service providers, gaining some advantage too.

Meanwhile, TA Research thinks that if the pipeline project linking Yan and Bachok were to become a reality, there would be spill over effects to the property sector, as land prices in the surrounding area would increase even as new property developments would take place.

Property players with exposure to the Northern region in Peninsular Malaysia such as Plenitude Bhd, Paramount Corp Bhd, Kejora Harta Bhd and Ranhill Bhd would likely benefit in this case.

TA Research also feels that construction players such as Gamuda Bhd and Malaysian Resources Corp Bhd would benefit as more infrastructure developments would be required to complement the major pipeline project.

Regional ambition

As for the economic reasons for having more oil-refinery projects in the country, Kaladher Govindan, the head of TA Research, explains that such projects are vital for the future growth of an oil-producing country like Malaysia.

Malaysia has an annual crude oil production of more than 650,000 bpd. According to the Oil & Gas Journal, Malaysia’s total crude oil refining capacity is currently estimated at 722,000 bpd.

The country has six refining facilities, three of which are operated by national gas company Petroliam Nasional Bhd, two by Shell and one by ExxonMobil.

By increasing its oil-refinery capacity, Kaladher says, Malaysia can tap into the business of refining shipments of oil that pass through the Straits of Malacca for exports to other Asian markets.

Singapore, with its total oil-refining capacity of 1.3 million bpd, is a major oil refining and trading hub in the region. This is despite its lack of domestic oil resources.

In the past, Malaysia had to depend on the refining industry in Singapore to meet its own demand for refined petroleum products. But after investing heavily in refining activities over the last two decades, it can now meet its domestic demand for refined petroleum products.

Malaysia also seems to be gearing itself up to be a major regional oil refining and distribution hub.

Analysts explain that building oil refineries in Malaysia makes sense because of the country’s strategic geographical location in the region that makes it an ideal gateway to East Asian markets. Additionally, the Government is also seen to be very supportive of such projects as it has put in place various tax incentives to promote the industry.

Therefore, foreign investors do find it attractive to develop such projects in Malaysia.

For instance, in February last year, Qatar-based Gulf Petroleum Ltd said it would be embarking on a three-year project to build a US$5bil (RM17bil) integrated oil and gas complex, comprising an oil refinery, a petrochemical plant and storage facilities, in Manjung, Perak. It was earlier reported that the proposed oil refinery would have a targeted capacity of between 100,000 and 150,000 bpd.

However, the dramatic slump of crude oil prices in the fourth quarter of last year to earlier this year cast some doubts over whether the project would still go on.

To this, the management of Gulf Petroleum early this year confirmed that it would continue with the development of the project in Manjung regardless of the oil price fluctuations and gloomy economic outlook.

With the recovery of the global economy in the next few years, an analyst says she expects to see more refinery projects in the pipeline as the country positions itself as a leading regional player in the industry.